Integrating prediction in mean-variance portfolio optimization

Andrew Butler; Roy H. Kwon

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arXiv · 2102.09287

Integrating prediction in mean-variance portfolio optimization

Andrew Butler·Roy H. Kwon

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Abstract

Prediction models are traditionally optimized independently from their use in the asset allocation decision-making process. We address this shortcoming and present a framework for integrating regression prediction models in a mean-variance optimization (MVO) setting. Closed-form analytical solutions are provided for the unconstrained and equality constrained MVO case. For the general inequality constrained case, we make use of recent advances in neural-network architecture for efficient optimization of batch quadratic-programs. To our knowledge, this is the first rigorous study of integrating prediction in a mean-variance portfolio optimization setting. We present several historical simulations using both synthetic and global futures data to demonstrate the benefits of the integrated approach.

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Andrew Butler, Roy H. Kwon. 2021-02-18. Integrating prediction in mean-variance portfolio optimization. https://arxiv.org/abs/2102.09287

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